The comments I received have been great. Given the length of my last response, I'm elevating the dialogue to full post status.

Anonymous comment:

"In this region of Colorado, the vast majority of sellers offer 2.8% to the buyer's agent as a matter of course."

Why on earth would anyone listen to an buyer agent that is incentivized to maximize the sale price?

Until there is a defined incentive for the agent to get the lowest price possible, buyers are going to continue to migrate away from agents."

My response:

Anon,

You're right to look at how your agent is compensated but you've reached a common misconception of how agents work.

The reality is that even the most aggressive negotiation makes a small difference to the overall commission for an agent. If you've worked with buyers for a while, you'd probably realize it doesn't tend to work the way you probably think it does.

Let's say you are getting serious. You're 2-3 months from making a decision, and it's time to start scheduling showings. You ask your agent to start finding you houses in a price range and location that you've specified.

So your agent starts sending you listings. Before setting up showings, your agent should also review homes you like and help you narrow the selections. If they're good, they'll point out homes that are close to busy roads, have undesirable features, or perhaps other flaws that you might not want to live with.

As your agent shows you homes, a good one will also refer you to a handful of select lenders to connect with so you can get a letter of qualification as well as a ball park sense of where you stand financially.

If your agent is trying to steer you towards higher price points, it will be pretty obvious. Just be sure to not confuse that with the reality of the market. Sometimes there simply aren't any homes at a price range that matches the features and location you want. A big part of a what a good agent does is educate the buyer on the market.

Worried you're getting duped? You can always search for listings yourself on the Internet. You can also get a very good sense of prices and inventory by looking at market statistics, such as my regular monthly updates.

If you're still concerned with the commission encouraging your agent in the wrong direction, structure the terms of the contract to minimize the impact. There's an infinite number of ways to do that in a fair way. Stepped commission structures, prepaid services, or even a negotiated flat commission come to mind.

Ultimately, the most important thing you can do is to pick your agent carefully. Find one who puts a priority on integrity, has substantial experience, and who won't compromise on working for you. Picking your agent because they share your ethnic heritage, because you happened to see their number on a park bench, or because it's an acquaintance/friend is the wrong approach. Whether you are buying or selling, you should research and interview several agents before making a decision on who you'll work with. Choosing the wrong agent is one of the biggest mistakes people make in real estate.

If the working relationship doesn't feel right, fire them and get a better agent. If you decide to do it yourself because you can do better on your own, go for it. More power to you. Just keep in mind there's a reason most self made millionaires didn't get there by being "do it themselfers." Specialized professionals in all fields know their business and the only way to do better is to become a professional in that area of expertise yourself. Most people eventually learn it's better to do due diligence on the professional than spend the years necessary to become an expert yourself.

Personally, I think it's better to focus spare time and energy, if you have any, on your own area of professional expertise, pursuing your passions, or with friends and family.

By the way, for a great book the benefits of using other professionals to get ahead, check out The Millionaire Mind. It's not a real estate book, it's an in depth and scientific look at how self made millionaires got that way. The findings might surprise you.

As always, your referrals are deeply appreciated.--The ideas and strategies described in this blog are the opinion of the writer and subject to business, economic, and competitive uncertainties. We strongly recommend conducting rigorous due diligence and obtaining professional advice before buying or selling real estate.

13 comments:

"In this region of Colorado, the vast majority of sellers offer 2.8% to the buyer's agent as a matter of course."

Os says: The reality is that even the most aggressive negotiation makes a small difference to the overall commission for an agent. If you've worked with buyers for a while, you'd probably realize it doesn't tend to work the way you probably think it does.

Great, let's try some test statements:

A broker on commission will act so that his commission is not maximized.

An environment where sellers are allowed to compensate the buyer's brokers will result in the broker always keeping the buyer's best interest in mind.

Are you really arguing that either/both of the above statements are true?

I arguing neither. I understand economic theories of self interest, but academic arguements often don't match up to the real world.

In practice, the vast majority of buyers come to us with a firm price range. For inexperienced buyers, we encourage people to reality check their financial situation before we get serious about shopping for a house. This way, everyone knows we're looking at the right houses and our buyers are more comfortable with the process. The last thing we want is to help someone buy a house they can't afford. The buyer is not happy long term, they're likely to face financial hardship, and they're an unlikely source of referrals.

More importantly, pushing people into houses they can't afford is simply the wrong thing to do.

There's an self interested, economic arguement for all sorts of unethical, immoral, and illegal behavior. The reality is that as a human being with a moral compass, profit is not the only determinant of my actions, not do I believe it's the behavior of most people.

From an ethics standpoint, we don't push people into high priced homes to benefit ourselves because its wrong. From a practical standpoint, buyers already have a price range when they come to us.

Believe it or not, we're more often on the other side of the coin, trying to help people choose a better lender, find a great house, a better long term investment, and get the best possible price on a house. I love helping buyers find a deal and frankly, when they win I feel like I'm winning. They'll recommend us to their friends and our business grows. The marginal difference to my commission isn't even a thought when we're negotiating.

Like I mentioned before, if the marginal commission/self-interest issue is a big deal for you as a buyer, you've got a couple of options.

a) Go without an agent (though you'll probably end up dealing with the seller's agent and he'll pocket both sides of the commission)

or

b) Structure a deal with your agent to minimize the perceived self-interest bias. You can offer a flat commission, a stepped commission, pay for services on a hourly basis, etc. We'd probably be willing to consider all of those options in a buyers agency contract.

I know there's a lot of mistrust of agents out there and some of that reputation is deserved. Just be careful painting all agents with a brush tarnished by a few rotten apples, especially when you can benefit tremendously from a good agent.

Happy house shopping (and let me know how it goes if you're in the market).

Speaking from the perspective of a buyer in the market right now. I think having a buyers agent is great help when in comes to finding homes, industry knowledge, getting paper work done right, making calls and appointments as well as streamlining the process.

However, I still have a lingering but distrust of agents and can sympathize with those opposed using a buyers agent. Here are a few of my reasons why:

1. I see very little incentive for the agent to work hard for “Me.” There is a ton of incentive for them to ‘make the sale’, but very little incentive for them to get me the lowest price I can on that sale or the best value for my money. In Fact, the more I overpay or the more overvalued the home is, the more money the agents walk with - it is a classic “used car salesman’ situation.

2. Most Real Estate agents play both sides of the fence, they act as buyer agents and seller agents. In some ways that seems like being a police officer and a career criminal at the same time (a lot of good puns could go here).

I worry that when my buyer agent calls the seller’s agent they say, “What can we do to make THIS SALE so we can collect our big fat commission check?”

What I want my agent to say is “What can you offer that ensures my buyer will be getting the very best deal on a home they can.”

3. This one is just for fun -- Real estate agents put pictures of their faces on every damn thing they can. I hate this! Do you guys think you’re so gorgeous that everybody wants to look at you all the time? :) The only other professions where people routinely put their own pictures on business cards and other things that immediately come to mind are ‘adult entertainers’ and ‘used car salesmen’ - not the group that I’d like advice from regarding potentially life altering purchases.

Even with this distrust, I’ve chosen to use a buyers agent because I lack a lot of industry knowledge and because I don’t have the time or motivation to do the leg work :(

I wish there were a separate buyers agent license and that buyer agents got paid more for getting thier clients a better deal.

I couldn't have been happier with my agent, I have to say. We thought about buying our first home sans agent and I will NEVER entertain that thought again. The trick is finding someone you can trust. I never could have waded through all that scary paperwork without Tony holding my hand. We interviewed 2 people we really liked and went with our guy based on a gut feeling. In the end it totally worked out for the best.

Who cares about the commission. It's a job, we all gotta earn our keep somehow. It's all a matter of watching out for the skanks and steering clear when they turn up.

Agents do have good reason to act on their customer's behalfs: hello, referrals. Bad names spread quickly, like the guy who sold the house next to us. Our neighbors complained that they were in a dual agent transaction, and later I found out the buyer is best friends' with the agents. Now that is not right and gives realtors a bad name, but there are some very good ones out there.

1. I see very little incentive for the agent to work hard for “Me.”... It's a classic used car salesman situation

The "used car salesman" mentality is something we fight constantly.

Once a buyer is ready to put in an offer, it takes me several hours to run the comps, dig up the history, and do a proper analysis in Excel. This is exactly the analysis I would do if I myself were buying the house. I present the results to my client and, if they're interested in my opinion, discuss various negotiation strategies. Ultimately, it's the buyer's decision for how the offer is structured and how they'd like me to negotiate on their behalf.

Randy, one thing that can do to help get the most value from your agent is to clearly communicate what you want and how you want negotiation handled. If you want them to help you find the best investment property, that's one thing. If you're looking for a primary residence where you'll spend the next 7-12 years of your life, that's another priority. If you want negotiation advice, the most efficient use of your time by only looking at certain listings, those are additional priorities. Help him (or her) figure out what's most important to you.

In the past we were a little more casual about it. But, we've learned from both successes and mistakes and it's very high on our list to learn a client's priorities as soon as possible. Bottom line? You can only exceed a client's expectations if you know what they are.

2. I worry that when my buyer agent calls the seller’s agent they say, “What can we do to make THIS SALE so we can collect our big fat commission check?”

What I want my agent to say is “What can you offer that ensures my buyer will be getting the very best deal on a home they can.”

We take a client's information in negotiation very seriously and do everything possible to avoid compromising a negotiation position. It's our duty to our clients and we know they are putting their trust in us. There are some things we must disclose by law, including material facts. But why a client is selling or how much they can afford, or how much they're willing to pay for the house, all stuff that impacts your bottom line, is something else entirely.

Having been around the block a few times, not just in real estate, but helping negotiate investment banking services and financing deals, I can report there are a lot of games played. That's why an experienced agent can help you.

Yes, most agents act as both buyer and seller representatives. But unless your agent is representing both on a house you want, I wouldn't worry too much about it. If the agent is selling his own listing, you probably should be very careful what you disclose. I'm not sure if you are local Randy, but here in Colorado if you don't have a buyer agency in place with your agent, he's acting as a transaction broker.

It's pretty important to know how the various types of agency (transaction broker, buyers agent, and listing agent) differ. We make a point of handing our clients a disclosure from the first day. By the way, many states still practice dual agency and sub-agency. This is one area of real estate where Colorado has moved in the right direction.

Still, know it's rare that a broker ends up representing both parties in the sale of his own listings. You might start with the listing agent (because you called him from his yard sign, for example) but pretty soon you're off looking at listings from other agents. It's how many people "find" their agent, but it's probably the worst possible way to do it. You're better off doing your research online (on agents), interviewing a handful, and then picking the one whom you feel most comfortable with and who offers you the best package of services.

We recently updated our list of buyer and seller services. If you'd like a copy, give me a call.

p.s. Be sure to communicate to your agent the concern about being compromised in negotiation.

3. This one is just for fun -- Real estate agents put pictures of their faces on every damn thing they can. I hate this!

I hate it too and I couldn't agree with you more. It's embarassing. One of my early sets of Re/Max biz cards had my photo and within weeks I custom designed and ordered a new set. Actually, I considered some of the best practices in business card design by local business guru Dave Taylor. you can see my redesigned card here.

Wow this response is getting long. Wasn't it Mark Twain who said, "I would have written something shorter if I only had the time." Thank you fingers for the fast typing.

I wish I had been your agent. Sounds like you had a very positive experience. And you're absolutely right. Referrals and word of mouth are what makes or breaks you in this business long term. I appreciate your comments (as usual).

You're right. There *are* exclusive buyers agents who claim to never take any listings. But it's a gimmick of little or no value. Trust me on this one. You're better off with an experienced agent who understands your priorities and will work hard to make sure you are satisfied.

Listings take a lot more work than representing buyers and they often have a direct, up front cost. Many new agents start off with only buyers, not because they don't want listings but because they can't find any. It's traditionally a lot harder to get listings than buyers.

After re-reading my comment, I realize that I can come of sort of terse at times and exaggerate the examples. But, you still put up with me:) Thanks.

Anyway, I do completely agree with your points of contention on this topic.

I just want to make sure I treat my agent or 'agent to be' as a service provider or pseudo employee rather than blindly assuming he or she is a trusted friend that is always has my best interest in mind.

I think that real estate agents are going the way of the travel agent. Once upon a time when you wanted to travel, you picked a destination and went to a travel agent to cut the ticket for you. Now-a-days, if you know where you're going, you buy your own ticket. It's when you're venturing into the unknown that you get an agent involved.

I think that regardless of your encouragement that agents won't steer you toward higher price points, my experience has been the opposite. My agent sends me to a lender, the lender figures out how to wring the maximum purchase price out of my income and credit, and my agent takes me to look at the homes he/she 1.) knows about 2.) would be comfortable putting the person they perceive me to be in and 3.) maximize that borrowing level because "real estate makes a great investment."

I think you're different Osman. You are the kind of person I would put on my teams as my real estate agent.

But I contend that the average agent is useful primarily when you're moving to a new area or when you want to be sold a house.

Thanks for commenting. I appreciate your vote of confidence. We constantly try to offer more value and better service to our clients. That philosophy drives this blog and our website too.

You might be right about the average agent. That's why I recommend buyers start by researching and interviewing experienced agents rather than looking at houses online. Don't settle for an average agent.

So are houses really like airline tickets? Until I got into this business, I had the same thought as you. As went travel agents so would go real estate agents. It hasn't worked that way and here's why.

Standard/commodity products such as airline tickets, consumer electronics, even high ticket items like cars are perfect for the Internet. What you buy is the same, more or less, no matter who sells you the item. You can use Consumer Reports, CNet, and hundreds of sources of information for advice and product reviews.

Homes represent the largest financial investment that most people make in their lifetime. Homes also aren't the same, even in a newer development. Prices shift, there are legal complexities involving substantial dollar amounts, and a bad decision has severe financial consequences.

Professional advice on selection, valuation, marketing, staging, negotiation, should be worth much more than the fees of a good agent. While homes do not always go up in value, expert advice can go far in reducing financial risk and maximizing value.

If you have the time/ability to become an expert in your local market and to acquire the knowledge to do it yourself, you can beat the professionals. You might even make an excellent living.

From a buyer/seller perspective, I think it's hard to find a good agent. The licensing standards are way too low, there are far too many realtors, and I think that makes it hard to tell the wheat from the chaff. The fact that many buyers "find" their agent by calling them from a yard sign or relying on a personal friend is the biggest indicator of this problem.

The point about your agent sending you to a lender is interesting. I particularly appreciate your perception of why agents do it. If early in the process, my practice is to send potential buyers to a lender for a reality check if I'm unsure of how far along they are in the process. A good lender educates buyers on loan programs, helps them understand how much they can comfortably afford and keeps me from showing homes to people who aren't qualified to purchase them. In this business, you might be surprised at how many people who want to look at homes they really can't afford. We try to avoid "house tours" for unqualified buyers, both to protect our time and as a courtesy to sellers who clean, stage, and vacate their homes for actual buyers.

If a client has bought homes before and has a good sense of how how they'll be financing the purchase, I don't see a reason to send them to a lender until we're getting ready to write an offer. At which point I put them in touch with local lenders we have had great experiences with, ask them to get a prequalification letter and to start shopping around. Traditional fixed rate mortgages, unlike houses, really are commodity products.

This is not unique to Boulder. As an agent I have been able to justify my keep by helping those in foreclosure.Foreclosures are on the rise nationwide.I am an expert in the Kenosha, WI real estate market. Kenosha is a small city of $150,000 people between Milwaukee and Chicago. I have found the best way to be successful in Kenosha, WI real estate is to specialize in foreclosures in the area. I have helped dozens of homeowners this year save their homes. This sill be my strategy for the entire downturn.

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